European stocks vulnerable to pullback before reaching new heights: Reuters poll

By Danilo Masoni and Samuel Indyk

MILAN (Reuters) - A growing number of investors and strategists expect a correction in their local European stock market over the coming three months, before the region's equities start rising again and hitting new highs in 2026, a Reuters poll found.

According to the poll 54% of respondents see a downturn of 10% or more on the horizon, up from 50% in November, after an already strong run this year that has propelled the broader European market into a rare outperformance against Wall Street.

As a result, the region-wide STOXX 600 is expected to trade around current levels at the end of 2025 before reaching a lifetime high of 610 points by the middle of next year, according to the median forecast in the poll.

The Euro STOXX 50 blue-chip benchmark index, which has leapt ahead of the STOXX 600 this year on gains in banks like Santander, software group SAP and luxury stocks, might instead face a bigger downside.

The median estimate points to a 6.5% drop by mid-2025 from 5,453.76 points at Monday's close. The index is forecast at 5,325 by year-end and then is expected to surge again to reach a new record at 5,725 by the middle of next year.

"Despite our expectations for a better year for corporates, with valuations higher than last year, and geopolitics (putting sentiment) on a knife-edge, a 10% correction is definitely a possibility at some point this year," said Morningstar strategist Michael Field.

Field said European markets are now "relatively fairly valued," noting that while momentum behind the region's shares was undeniable, future advances may rely on investor sentiment rather than underlying fundamentals.

So far this year, the STOXX is up over 9% and the blue-chip index is up 11%. That compares to an only 1.7% gain for the S&P 500, which was dragged by cooling enthusiasm over tech.

Andreas Bruckner, European equity strategist at Bank of America, says slower global growth will hit profit forecasts and lift risk premia, offsetting dovish monetary policies. His mid-2025 forecast of 470 points is the most bearish.

Tomas Hildebrandt, senior portfolio manager at Evli in Helsinki, cites rising uncertainty over tariffs and the Ukraine war as key concerns, noting that a long-term solution to the conflict still looks distant.

"Trade spats make corporates' planning challenging, it could reflect on order intake, supply chains, logistics, investments, foreign operations and other business activities," he said.

VALUATION GAP

Despite the pullback risks, investors are more upbeat on 2026, when European earnings growth is expected to rise to 11.2% from 7.5% in 2025, per LSEG Datastream data.

Still cheap relative valuations, a potential rebound in Chinese markets, increased defence spending, along with rate cuts by the European Central Bank and possible fiscal stimulus are all favourable tailwinds for European equities.    

"Valuations are not at extreme levels. Inflation is also not spiralling out of control, and monetary policy, while not providing a boost, will at least not work against us. Earnings are growing," said Marco Vailati, head of research and investments at Cassa Lombarda.  

Among regional markets, Germany's heavyweight DAX is seen falling over 4% to 21,455 points by mid-2025 compared to Monday's close and remaining below current levels this year.

London's FTSE 100 instead is seen climbing further to 8,800 and 8,845 points by mid-2025 and end-2025, rising to 9,000 by mid-next year.

Likewise, Italy's FTSE Mib is expected to also keep rising this year. France's CAC 40 and Spain's IBEX are forecast to rise by mid-2025 before pulling back in the second part of this year.

"The valuation gap between European companies and their U.S. counterparts has seldom been this wide," said French asset manager Carmignac. "Such a backdrop should be beneficial".

The STOXX 600 trades at a near record discount of about 36% to the S&P 500 on a 12-month forward PE metric, LSEG Datastream data shows.

(Other stories from the Reuters Q1 global stock markets poll package)

(Reporting by Danilo Masoni and Samuel Indyk; additional polling by Sarupya Ganguly and Jaiganesh Mahesh; Editing by Sharon Singleton)